An index of sustainable economic welfare (ISEW) for...

Ecological Economics 28 (1999) 231–244

ANALYSIS

An index of sustainable economic welfare (ISEW) for Chile

Beatriz E. Castaneda *Marine Estuarine En!ironmental Science, MEES, Uni!ersity of Maryland; 205 SW 75th St. 3-I, Gaines!ille, FL 32607, USA

Received 28 July 1997; received in revised form 20 March 1998; accepted 26 March 1998

Abstract

Chile has experienced a period of strong economic growth. The Gross Domestic Product (GDP) has doubled in thepast 12 years, however, income inequality remains relatively the same as in the 1960s. The economic growth isprimarily attributed to the exports of natural resources, which accounts for 80% of total exports. However, the GDPfails to account for the loss of natural capital and non-marketed services. The objective of this paper is to more clearlyindicate the status of the Chilean economy in terms of welfare using the Index of Sustainable Economic Welfare(ISEW) designed by Daly and Cobb (1989). The ISEW provides corrections to the GDP that includes incomeinequalities, household labor and damage to natural capital. This index has been applied in several case studies fordeveloped countries. In general, the results show that ISEW runs parallel with GDP until the 1970s when a declinein welfare occurs due to a loss in natural capital. This study is the first attempt to utilize the ISEW for the purposeof analyzing whether or not similar trends exist for Chile, a developing country. The ISEW for Chile grew at a muchslower annual rate over the past 30 years, compared with GDP (!0.16% vs. 2.9%). The Chilean ISEW parallels theGDP until the 1980s; a decline in the ISEW then occurs, showing that Chile is not on a sustainable path and thatthere is a strong link between economic growth and the depletion of natural resources. © 1999 Elsevier Science B.V.All rights reserved.

Keywords: Economic welfare; Economic growth; Accounting; Chile

1. Introduction

Chile has experienced a period of strong eco-nomic growth, but the health and productivity

cost of environmental problems have become ap-parent, and income inequality has not decreased.The Index of Sustainable Economic Welfare(ISEW; Daly and Cobb, 1989), was developed asa more accurate indicator of welfare which incor-porates these and other issues. Therefore, it will* Tel.: +1 352 3315650; e-mail: [email protected]

0921-8009/99/$ - see front matter © 1999 Elsevier Science B.V. All rights reserved.PII S0921-8009(98)00037-8

B.E. Castaneda / Ecological Economics 28 (1999) 231–244232

be very useful to investigate the behavior of thisindex in a developing country such as Chile. Also,it will be particularly interesting to compare thisresult with those already obtained for other previ-ously developed countries.

Discussions of the effect of economic growth onsocial welfare and the environment have beenactive since the late 1960s, addressing such ques-tions as how economic growth can contribute tofurther increases in social welfare (Nordhaus andTobin, 1973), and if economic growth will belimited by the scarcity of natural resources andhigher levels of pollution (Boulding, 1966;Georgescu-Roegen, 1971; Daly and Cobb, 1989;Daly and Townsend, 1993). The links betweeneconomics and the environment have multipledimensions and complexities, and their repercus-sions on social welfare are not always obvious.Moreover, the links between these two systemsvary between countries, cultures, regions, levels ofpoverty, and the type of policies applied. In orderto achieve sustainability, it is necessary to haveappropriate performance indicators of the econ-omy and natural systems that give us appropriateinformation about the status of those systems.

In economics, the most commonly used indica-tor of activity is the Gross Domestic Product(GDP). There is a comprehensive system alreadyin place to estimate the GDP, the System ofNational Accounts (SNA). The GDP is an aggre-gate statistical measure of the overall productionof the economy within the national territorywhich is expressed in a common monetary unit.The GDP sums up the different final goods (cars,apples, etc.) and services (medical surgeries, hair-cuts, etc.) valued at market prices and producedin a certain period (Sachs and Larrain, 1993).

One of the main failures of the GDP is that itdoes not take into account the depreciation of‘natural capital’, therefore, making the linkagesmentioned above very difficult to track. In devel-oping countries where there is a strong link be-tween poverty and environment, and whereeconomic growth is based largely on natural re-sources, this omitted value can be a misleadingsignal of real economic growth (Lutz, 1993). TheGDP is certainly an important management toolat the macro level, however, its many shortcom-

ings can turn the attention of authorities awayfrom sustainable development policies (Repetto etal., 1989).

In general, there is a tendency to use GDP as ameasure of welfare. Countries with high GDPgrowth are presumed to have higher welfare, yetthe GDP makes no distinction between growthdue to ‘‘...investment in new schools...’’ or growthdue to ‘‘...payments to clean up a toxic wastespill...’’ (Hawken, 1997). Because of the shortcom-ings mentioned above, it is obvious that an in-crease in GDP does not necessarily increase thewell-being of a country. A notion of welfare in-cludes not only income, but also individualhealth, environmental health, quality of life, andservices that are outside the economy such aschildcare.

The GDP is a snapshot of today’s economy anddoes not account for sustainability (i.e. deprecia-tion of natural capital is not included). If thepolicy of a country is to increase the GDP (i.e.increase consumption), even if natural resourceswere abundant and pollution not a problem, thereshould be a ceiling for that growth, and therefore,it should be possible to define optimal limits toper capita consumption, with constraints to in-come inequality (Hannon, 1991). Finally, fastereconomic growth it is not sufficient to assure anequitable distribution of income.

There have been other attempts, besides theISEW, to overcome the GDP shortcomings, eachof them with their own methodology constraints.The Measure of Economic Welfare (MEW), de-veloped by Nordhaus and Tobin (1973), includesadjustments for non-marketed services but doesnot include natural capital or degradation of theenvironment; El Serafy’s methodology that ad-justs the Net National Product by the deprecia-tion of non-renewable resources (El Serafy, 1989);and the System of Environmental and EconomicsAccounts (SEEA) developed by the United Na-tions that creates a satellite account system fornatural resources, allowing the introduction of theenvironment into decision making through a com-mon framework (Bartelmus, 1994).

In summary, from the environmental point ofview, national accounts fail to consider scarcity ofnatural resources, degradation of the environ-

B.E. Castaneda / Ecological Economics 28 (1999) 231–244 233

Fig. 1. Evolution of GDP, Private Consumption (PC), and Government Expenditure in Chile between 1965 and 1995.

ment, and their effects on human health andwelfare.

The link between economics and the environ-ment is crucial for developing countries. Theirmain concern, with respect to natural resources,should be in how to treat them as a form ofcapital, an asset of the economy that can have thepotential for long-run contributions to productiv-ity and welfare, and also in how to account forthe ‘true social value’ of non-marketed goods andservices.

2. Chile, as a case study

There have been two serious recessions in Chile,in 1975 and 1982, followed by significant eco-nomic growth. In 1973, a military coup occurredwhich transformed the Chilean economy from oneof the most regulated into one of the most dereg-

ulated economies in Latin America (Raczynskiand Romaguera, 1995). Reforms included decon-troling the price system, privatizing public enter-prises, reducing the role of the state, andliberalizing international trade and financial mar-kets. After these reforms, high unemployment,high interest rates, high (but stable) inflation, andhigh internal and external debt still persist. In1982, the GDP fell 14.1%, and Chile faced itsworst recession since the 1930s. Fig. 1 illustratesthe drastic drop in GDP and personal consump-tion in the 1973 and 1982 recessions.

Currently, Chile is widely recognized as havingthe most open, stable and liberalized economy inLatin America. With a market-based economy,fast growth and exports based on natural re-sources, Chile grew at a annual average rate of6.7% over the last 6 years (Fig. 1); investment andsavings were at 28 and 27% of the GDP, respec-tively, in 1995; and fixed capital formation grew


Fig. 2. The Index of Sustainable Economic Welfare (ISEW) compared to GNP for US, Germany, UK, Austria, The Netherlandsand Austria between 1950 and 1992 (Jackson and Stymne, 1996).

faster than the GDP in 1995. Since 1989, bothfixed capital formation and national savings haveaveraged about a quarter of the GDP. In the last12 years, Chile has had a sustained economicgrowth that has doubled the GDP.

Since 1960, Chile has also increased its level ofHuman Development Index (HDI) from amedium level of development to a superior cate-

gory; however, income distribution currently ex-ists at the same level of inequality as was presentin the 1960s (PNUD, 1996). The ratio of therichest 10% to the poorest 40% is 3:1, even thoughpoverty was reduced by 30% in absolute numberof persons (MIDEPLAN, 1996).

Chile’s main environmental issues are: (a) ur-ban pollution of air and water; (b) industrial


Table 1Summary of the ISEW methodologya

Pos./Neg.Item MethodologyRationale

Basis for the index From Chilean National AccountsConsumer expenditures (A)Gini coefficientAccounting for income inequalityIncome distribution (B)

A/B Adjusted base for the indexWeighted personal consumptionIncorporate non-monetarized contribution+ Women’s wages times workforce dedicatedServices from domestic laborto welfare to domestic labor (Universidad de Chile,

1989a; INE, 1965–1996)+ Accounting for service value of consumer 22.5% of total expenditures on durableServices from consumer durable

stock (Banco Central de Chile, 1983; Universidadde Chile, 1989b)6% of GDP on transportation and comuni-+ Accounting for service provided not in-Services from street and highwayscation (10% depreciation, 64% non-commut-cluded in personal consumptioning, of which 10% is real service to theconsumer (Banco Central de Chile, 1983)

+ Adding in non-defensive expensesPublic expenditures on health and Half of the goverment final consumption oneducation education and health (Banco Central de

Chile, 1983)!Expenditures in consumer durable Accounting for defensive expenditures on Total expenditures on consumer durable

(Banco Central de Chile, 1983)stock replacement! Half of the private expenditures on healthAccounting for defensive expendituresPrivate expenditures on health

and education and education (Banco Central de Chile,1983)36% of total expenditures on personal travelSubtracting defensive private expenditures!Cost of commutingin 1994 (Zegras, 1997)

! Subtracting defensive private expenditures US average values per accident times num-Cost of car accidentsber of car accidents in Chile (INE, 1965–1996)

! Subtracting defensive private expendituresCost of crime 1994 cost extrapolated using number ofcrimes (Guzman, 1994)

Cost of water pollution ! 1992 cost of imputed cases of Typhus fever,Subtracting cost of environmental damageextraplated using number of imputed cases.(Fereeccio et al., 1994)

! Subtracting cost of environmental damageCost of air pollution 1992 health cost associated with increases inPM10, extrapolated using amount of PM10(Ostro et al., 1994)

Subtracting cost of environmental damage OmittedCost of noise pollution !OmittedAccounting for loss in natural capitalLoss of wetlands !Productivity (Ag GDP/total Ag surface)! Accounting for loss in natural capitalLoss of farmlandtimes 1000 ha lost each year due to urban-ization minus 1% of total Ag land that isconsider eroded (Banco Central de Chile,1983)Cost of replacing each barrel of oil equiva-Accounting for loss in natural capitalDepletion of non-renewable re- !

sources lent (US$75) consumed with a renewablesource (INE, 1965–1996)

!Depletion of renewable resources Hotelling rent (Vincent, 1996; Cloude andPizarro, 1995; FAO, 1994, 1995)Energy consumption times accumulative!Long-term environmental damage Subtracting cost of environmental damagedamage value (US$0.50; INE, 1965–1996)

! Subtracting cost of environmental damageCost of ozone depletion OmittedAccounting for formation of manmade Minimun capital per worker required for the+Net capital growthcapital next period (Banco Central de Chile, 1983)

Omitted+Changes in net international posi- Accounting for international stabilitytion

a Modified from Jackson and Stymne, 1996.


Fig. 3. ISEW ‘per capita’ and GDP ‘per capita’ in Chile 1965–1995 (1990 pesos).

pollution by localized industries, mining, etc.; and(c) intensive use of natural resources, includingnative forests and fisheries.

These problems are mainly related to the exportsector. In 1994, 50% of total exports were fromnatural resources (forestry, mining and fisheries),with 34% from mineral exports; together theycontribute 16% to the total value added. Thenecessity for expansion of the export sector is such

that any effort to approach the problem seemsmeaningless. Such was the case with the forestrysector.

The Central Bank of Chile decided to implementSEEA for the forestry, mining and fisheries sectors(Cloude and Pizarro, 1995). One of the main resultsof this study are the stocks balance sheets of nativeforest, thereby creating links between different usesof the forest and its consumption. This measureallows one to estimate the changes in the surfaceof native forest by using future consumption esti-mates. These estimates indicate that Chile has lostbetween 400 and 900 thousand hectares of nativeforest between 1985 and 1994 because of thesubstitution of native forest with monospecificplantations of pine and eucalyptus, clearing foragricultural use, and fires. A complete loss of thenative forest was predicted to occur within 20–25years, assuming a 5% increase in consumption. Thisprojection created a national debate in Chile, withthe forestry sector arguing about the effect theexport of their products to developed countries

Table 2Percentage of annual ISEW/per capita and GDP/per capitagrowth every 5 years

ISEW/CAP GDP/CAP

1965–1970 1.87 2.20!5.20 !2.141970–1975

5.771975–1980 4.40!4.021980–1985 !1.53

4.30!0.351985–19901990–1995 4.10 5.30

88.60!4.90Total growth: 1965–1995


Fig. 4. ‘Positives’ contribution to ISEW. ‘Household labor’ is first added to ‘Weighted personal consumption’, and then all the otherpositive adjustment (Table 1), arriving to ‘Total positives contributions’.

(The Economist, 1996). As a consequence, theCentral Bank project was canceled and no extrainformation was released.

This clearly shows the conflict between economicgrowth and preservation of natural capital, andalso how strong the pressures from the privatesectors are.

3. Index of sustainable economic welfare (ISEW)

The ISEW was developed by Daly and Cobb(1989) for the United States. The ISEW includesadjustments for income distribution, environmen-tal damage, the value of housework and resourcedepletion among hosts of other modifications (Dalyand Cobb, 1989; Cobb and Cobb, 1994).

In general, the philosophy of the ISEW is toadjust personal consumption for those expensesthat do not necessarily increase welfare (defensiveexpenditures), and for those contributions that mayincrease it (non-defensive expenditures). These ad-justments are either not considered at all in thetraditional accounts or they are misrepresented.

So far, there have been six attempts to implementthe ISEW (i.e. USA (Daly and Cobb, 1989), UK

(Jackson and Marks, 1994), Germany (Diefen-bacher, 1994), The Netherlands (Rosenberg andOegema, 1995), Austria (Stockhammer et al.,1995), British Columbia (Gustavson and Lonergan,1994) and Sweden (Jackson and Stymne, 1996)).The results of these analyses are shown in Fig. 2.In general, the ISEW runs parallel to the GDP ata lower rate of change until the 1970s, where afaster decline in the ISEW is observed for allcountries shown except The Netherlands.

There have been several critiques of this indexwhich are summarized in Cobb and Cobb’s revisedISEW (Cobb and Cobb, 1994) and in each of thecountry cases. In summary, they are first dividedinto specific methodological inquiries such as ad-justment to personal consumption by income in-equality, the ‘imputations of cost imposed uponfuture generations by depletion of natural re-sources’ (Cobb and Cobb, 1994, p. 47), and theestimates for environmental degradation, which arevery uncertain (e.g. effect of global warming).Secondly, there are broad criticisms, such asISEW’s inability to be used for international com-parisons, at least quantitatively, given the differ-ences in methodology. Some of the defensiveexpenditures calculated have a very local effect;


Fig. 5. The effects of the ‘negative adjustment’ of the index. ‘Defensive costs’ and ‘environmental degradation’ are subtracted fromtotal ‘positive contributions’. Then it is subtracted ‘depletion of natural capital’ and finally ‘long-term environmental costs’ obtainingthe final result for the index, ISEW.

therefore, it is not obvious how to extrapolatefor the rest of the country. The index assumedwelfare is to be proportional to consumption;the index omits human capital and ignores ameasure of ‘happiness’ that is correlated withrelative rather than absolute levels of income.

In general, the methodology and the rationaleto calculate the ISEW is as follows. The ISEWwas intended to be a more accurate measure ofwelfare. In doing so, the index uses personalconsumption (PC) as a starting point. PC in-cludes only the total final expenditures by con-sumers; it excludes government expenditures andtrade. The PC then is adjusted for income in-equality. Next, expenditures that are considereddefensive (i.e. increased personal consumption,but not necessarily welfare) are subtracted.These expenditures are the costs associated withair and water pollution, over population andcongestion, and a portion of healthcare and ed-ucation. Non-marketed services such as house-hold labor and a proportion of governmentexpenditures for healthcare and education (con-

sidered non-defensive, therefore increasing wel-fare) are included. The PC is then adjusted fordepletion of natural capital and added net capi-tal formation (which takes into account stocksof capital that should be preserved over time inorder to maintain consumption). Table 1 detailsthe objectives and methodologies of each por-tion of the index utilized for this work (detailedexplanation in Castaneda, 1997).

This study, in particular, incorporates twonew columns and omits three with respect toCobb and Cobb’s revised version of the ISEW(Cobb and Cobb, 1994). The new columns are‘Depletion of renewable resources’ and ‘Criminalcost’. These categories should have an importantimpact on welfare and the economy of thecountry. The omitted columns are ‘Loss of wet-lands’, ‘Cost of ozone depletion’, and ‘Interna-tional position’. These categories were omitteddue to a lack of data.

All data are computed in 1990 Chilean pesoswhich have been converted using the GDP im-plicit price deflator unless otherwise specified.


Fig. 6. Relationship between ISEW and personal consumption (ISEW/PC) for Chile, 1965–1995.

4. Results and discussion

Fig. 3 and Table 2 show the general results forthe ISEW (for details, Castaneda, 1997, TableA1). During the last 30 years, the GDP increased88% at a annual rate of 2.95%. The ISEW de-creased by 4.9% at a annual rate of !0.16%.Table 2 shows the average growth for every 5-yearperiod. The sharp decline after 1973 is primarilydue to a decrease in personal consumption pro-duced by a recession, as previously explained inthe Introduction of this report.

On the non-defensive side, using ‘Weighted per-sonal consumption’ (PC adjusted by income in-equality) as a starting point, the contribution ofhousehold labor to the economy is quite signifi-cant (Fig. 4). As shown in the previous studies,household labor services contribute to approxi-mately 80% of the total ‘positive’ contributions tothe index over the period of study. These servicesincreased in absolute terms mainly due to anincrease in women’s wages and population. Also,

Chile is a young country, the size of families islarge, and 50% of the population are women(appox. 20% work at home).

Fig. 5 shows the effects of the ‘negative’ adjust-ments to the total ‘positive’ contributions (PCplus non-defensive expenditures). ‘Defensive costs’include the costs of car accidents, criminal activi-ties, and commuting costs; ‘Environmental degra-dation’ includes costs for water and air pollution;while ‘depletion of natural capital’ includes loss ofagricultural land, and renewable and non-renew-able resources.

Fig. 5 also shows the importance of the deple-tion of natural resources in relation to the overallresult. One important factor to bear in mind isthat depletion of non-renewable resources accountfor nearly all of the impact, where renewableresources are smaller by three orders of magni-tude (See Castaneda, 1997, Table A1). The waythat depletion of renewable resources (forest) wascalculated underestimates the loss, because it doesnot include erosion, loss of biodiversity, industrial


Table 3Annual per capita growth for different sensitivity adjustments to ISEW

ISEW-LT/capb ISEW-NR/capcISEW-IP/capa ISEW-FW/capd

2.0 2.81965–1970 2.12.2!4.3 !5.8!5.0!5.01970–1975

!5.7 5.7 5.5 5.71975–1980!5.4!2.9!3.7!13.01980–1985

2.5 !1.91985–1990 36.6 0.15.0 3.51990–1995 5.5 4.0

1.3 41.2Total growth: 1965–1995 !27.6!1.5

a ISEW with international position.b ISEW without long-term environmental costs.c ISEW calculated using Hotelling rent for depletion of non-renewable resources.d ISEW calculated using replacement cost to estimate depletion of renewable resources.

pollution, and other long-term losses. Interest-ingly, the exhaustion time for native forest isapproximately 50 years. Fig. 5 also shows that‘Defensive costs’ have an important impact on thelast 5 years, reflecting increasing costs of agglom-eration of people in cities and urbanization, com-muting, and crime costs.

Surprisingly, adjustments for degradation ofnatural resources show no significant impact onthe overall result. The methodology used to calcu-late costs for air and water pollution involvessome possible double calculation for costs alreadydeducted in private expenditures for healthcare.Nevertheless, this method still underestimates truecosts (e.g. the damage to crops due to acid rainand corrosion are not included in the calculation).

In summary, ISEW runs parallel to GDP until1985. After the recession of 1982, Chile almostdoubled GDP per capita while ISEW decreased(Fig. 3).

In the previous ISEW country studies, ISEWwas compared with GDP. However, it is alsointeresting to compare the index with the startingpoint, personal consumption. If we look at therelative importance of private consumption withrespect to ISEW (ISEW/PC), values below onewould indicate an increasing gap between the two,in which private consumption increases but ISEWdoes not, reflecting a decline in welfare. Fig. 6shows this type of relationship for Chile. It indi-cates that in the past 30 years, the gap betweenhow much was spent by the consumer in defensive

costs has increased with respect to non-defensiveexpenditures over the period of study, by decreas-ing its welfare, especially after the 1980s. (ISEWdecreased even though private consumption in-creased over the period of study.)

5. Sensitivity analysis

Following Daly and Cobb’s sensitivity analysis(Daly and Cobb, 1989), this study includes adjust-ments for long-term environmental costs and al-ternative measures for depletion of natural capital(native forest and copper). Also, this study ex-plores the effect of ‘international position’, thatwas omitted in the final calculation of ISEW.

International position was originally excludedfrom this calculation for two reasons: (1) lack ofdata for years prior to 1980; and (2) the inclusionof this adjustment intended to show the borrow-ing-lending status of a country. The rationale isthat a increase in foreign debt worsens welfarebecause it is money that eventually has to berepaid with interests. A decrease in the interna-tional debt is certainly a benefit, but an increase inforeign debt (e.g. investments) could increase pro-ductivity in a certain period and should not beconsidered entirely as a cost.

For purposes of comparison, ISEW was calcu-lated using this adjustment (ISEW-IP). In order totabulate this new column, data on total nationalforeign debt for 1980–1995 was taken from


Fig. 7. The impact of international position on the ISEW (ISEW-IP) for Chile, 1965–1995.

World Debt Tables (The World Bank, 1996). Thedifference in the debt for every year was calcu-lated and then added to personal consumption,where positive numbers indicate a decrease in thedebt. For years before 1980, it was assumed thatthere was no change in international position.Table 3 summarizes the results. The rate ofgrowth for ISEW-IP increased and shows a moreirregular shape; consequently, over the last 10years ISEW-IP grew more rapidly than GDP (Fig.7).

The second sensitivity analysis is relative tonatural resources and the environment. If long-term environmental costs are omitted, ISEW-LTshifts upwards, yet keeps the same basic shape(Fig. 8 and Table 3).

If depletion of non-renewables is calculated us-ing Hotelling rent instead of replacement cost, theISEW-NR shows a similar overall trend, whereas

ISEW-NR grows slower than GDP but does nothave the decline in growth during the last 10 years(Fig. 8 and Table 3).

In southern Chile, where all the forest is lo-cated, there are several small human settlementsthat open the forest for agricultural and firewoodpurposes. These settlements produce a patchylandscape, apparently without importance, but itis a growing population in a subsistence economy(Fuentes, 1994). Wilcox (1993) estimates thataround 7 million m3 of forest are extracted fordomestic and industrial firewood. In order toaccount for this issue, which is not reflected inHotelling rent, the depletion of renewable re-sources was calculated using the same methodol-ogy as for non-renewable resources. Thus, fromthe values of energy consumption coming fromfirewood only, replacement cost was calculated(barrel-equivalent of oil times US$75). This


Fig. 8. The impact of several sensitivity adjustments to ISEW for Chile, 1965–1995.

method has a much larger impact on the overallindex where ISEW-FW decreased over the last30 years by 27.6% (Fig. 8 and Table 3). Theonly purpose for this exercise is to show theimportance of the environment within the econ-omy of the country, taking into account all therestrictions in the methodology.

6. Conclusion

In summary, ISEW grows slower than GDP;household labor and depletion of natural capitalare the important adjustments, and degradationof the environment ranks among the less impor-tant adjustments considered. This result is notsurprising considering that Chile is a developingcountry and natural resource export based. Es-pecially since the 1980s, Chile has been on a

non-sustainable path, and welfare has not in-creased over the last 30 years, as observed inthis work.

Even though GDP almost doubled in the last12 years, this increase has not translated into anincrease in welfare. On the contrary, a more in-tensive economy has produced a change in theconsumer’s basket; whereas 30 years ago, it wasprobably more oriented to basic needs, and nowthose expenses are oriented to defensiveexpenditures.

This result argues in favor of the thresholdhypothesis stated by Max-Neef (1995) that ‘‘...for every society there seems to be a period inwhich economic growth (as conventionally mea-sured) brings about an improvement in the qual-ity of life, but only up to a point, the thresholdpoint, beyond which, if there is more economicgrowth, quality of life may begin to deteriorate.’’


The ISEW developed for Chile in this workhighlights the shortcomings of traditional eco-nomic measures, in particular GDP. It also showsthe direct link between GDP growth and thedepletion of natural capital. It also highlights thelack of crucial data, such as the stocks of renew-able resources, non-renewable reserves, and thesocial costs of pollution.

Certainly ISEW can be improved. The indexstill depends on market prices and some question-able measures, such as the value of replacementcosts for non-renewable resources. Given that theindex uses market prices, the result underesti-mates the real cost of depleting natural resourcesand degradation of the environment. Loss in bio-diversity, depletion of marine resources and othernon-renewables, and a measure of decreasingleisure time are omitted from the calculation ofthe ISEW. Therefore, if these values are incorpo-rated, the ISEW would be expected to decreaseeven further.

Some of the recommendations that can bemade as a result of this study are the importanceof alternative measures or indicators of real eco-nomic growth and welfare. It is important to stopcounting depletion of natural capital as income. Ifthe policy of Chile is to continue to grow at theexpense of depleting natural resources, this deple-tion should be counted and acknowledged. Omit-ting this value will imply that Chile’s future willhave a lower level of welfare and will be a poorercountry. In order to enter a sustainable path,Chile should design and use policies that createincentives for qualitative development rather thanconventionally measured economic growth.

Acknowledgements

I would like to thank my advisor, RobertCostanza, and the master’s thesis committeemembers, Herman Daly and Ramon Lopez, forall their suggestions and support; Osvaldo Sunkelfor letting me work with his group at the Univer-sidad de Chile in Santiago; Tim Jackson, whosework has helped me to understand the ISEW andto write this paper; and the reviewers for theirvaluable comments and suggestions. Finally, I

want to express my deepest appreciation tofriends and colleagues, for their support, encour-agement and the enjoyable times I had during mygraduate studies.

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